When litigation arises from a real estate transaction, agents are usually bystanders, watching intently as buyers and sellers volley in court like tennis pros. However, in rare instances, agents and brokers battle each other in the courtroom.
The most common reason for agents to sue other agents is money. Recent agent litigation in Illinois courts, and most other jurisdictions, highlights the cold truth of running a small or self-run real estate business: people want your business, and they will aggressively pursue it.
However, those cases also provide a reminder that there are often simple ways to avoid time-consuming and expensive litigation. Here are three of the most notable:
1. Draft partner/team agreements regularly
In the area of agent-on-agent litigation, commission splits are a very common source of conflict. It is common for agents to partner up in a new business or team and agree initially on a certain revenue split, only to have that modified as the business takes shape. In reality, many businesses operate this way. It is entirely practical for business owners to verbally agree on new payment structures that were not contemplated in their original operating agreement.
However, it is paramount to amend your formation documents or simply solidify your agreement to writing when it becomes firm. In many cases involving commission-split arguments, the court looks for a written document, because it’s assumed that a contract most objectively represents the parties’ intentions.
For example, in a case involving the formation of a team of agents within a brokerage, the court ruled that a prior agreement would assist in determining a standard commission split. However, discovery showed that there was no consistent commission split; agents were paid irregularly from closing proceeds. Because the team was pooling funds into its overhead costs, splits were inconsistent. Moreover, there was so much animosity between the team members that obtaining records was nearly impossible, because most had been destroyed or modified. The efforts to rebuild the financials, as well as draft pleadings to explain the verbally-agreed commission splits to the court, were a costly endeavor.
As your firm or team adjusts its payments structure, be sure to have a meeting to overview the new system. This should include discussing bonuses for performance or any new tasks that become a part of a team member’s responsibilities in lieu of payment. A simple, bulleted memorandum prepared by the team members can often suffice so long as it is subsequently followed.
2. Avoid “blacklisting” agents/brokerages
There is a tendency in the real estate business to forgive but not forget. After all, if an agent interferes with a commission or a closing, there are likely going to be some burned bridges. Other than recognizing the tendencies of another agent or brokerage and how they may affect your transaction with them in the future, avoid making disparaging remarks about other agents within the real estate community. Even though Chicago is a massive market, your efforts to avoid one brokerage can soon be considered an effort to “blacklist” someone. And when that happens, there are legal consequences.
In one Illinois case, an entrepreneurial agent alleged that several area firms refused showings on the basis that the brokerage was undercutting commission amounts. The agent’s advertisements promoted this fact, and this low-fee publicity obviously impacted area brokerages that were offering listing commissions at more common percentages. Although the case settled, the efforts to “blacklist” the agent brought bad publicity to the entire area’s real estate market. Most significantly, it cost the defending brokerages a great deal of time and money in court.
3. Submit all offers to sellers prior to acceptance
This concept was less cloudy before the Internet. State law and your ethical obligations require all offers to be submitted to sellers; however, in recent years, there have been many instances of listing agents refusing offers from buyers represented by rebate-driven firms or online brokerages. The Internet is here to stay, and the real estate business is changing, so be sure to recognize that offers may come from non-traditional entities. Along the same lines, FSBO, short sales and foreclosed properties should not be restricted because of agent preference, but rather the client’s preference.
Illinois is one of many states that has adopted legislation to allow Internet-based firms to compete alongside traditional models. Penalties include fines or the loss of license. Gone are the days when certain listings were withheld from the MLS, thanks to online broker lawsuits and lobbying efforts. And in the coming years, there will undoubtedly be more adjustments within the online real estate community, including the marketing of properties and acquisition of clients. As these areas evolve, a traditional brokerage can also capitalize on the online space by generating more leads online, encouraging client/peer reviews and connecting with potential buyers virtually.
Michael Mazek, of Mazek Law Group LLC, is a real estate transactional and litigation attorney located at 3805 N. Lincoln Ave, 773-800-0141.